GOEX - Marathon Gold Stock In Freefall But A Recovery Is Possible

Summary

• Marathon Gold is a gold development company that has faced numerous challenges in the past year, with its shares falling 65%.
• Its Valentine Gold Project has strong potential, with proven reserves of 2.7 million ounces of gold, and 5+ million ounces in resources.
• Marathon's risks seem to be fully priced in by the market as we enter 2023, and the stock offers good value, as I argue below.

Marathon Gold Stock in Freefall: Is a Recovery Possible?

Marathon Gold (MGDPF) is a gold development company focused on advancing its Valentine Gold Project in the Central Region of Newfoundland and Labrador. It was one of the gold sector’s worst performers of 2022, with its shares falling by 65%.

However, based on Marathon Gold’s current valuation, the value of its gold project (as outlined in an updated December 2022 feasibility study), the prime location of its project, and the likelihood of higher gold prices in the future, I believe Marathon’s stock offers compelling value here.

While there are risks and challenges to consider, I believe that investors should consider buying the stock at its current price, and I think 2023 will be a much better year for the company compared to 2022.

Marathon Gold: A Company Overview

The Valentine Gold project is expected to become the largest gold mine in Atlantic Canada and is estimated to have the following reserves and resources:

• Proven and Probable Mineral Reserves of 2.7 million ounces of gold (51.6 million tonnes at 1.62 grams per tonne of gold);

• Measured and indicated resources of 3.96 million ounces (64.62 million tonnes at 1.90 g/t Au);

• An additional Inferred Mineral Resource estimate of 1.10 million ounces (20.75 million tonnes at 1.65 g/t Au).

A feasibility study released in December 2022 outlined plans for an open-pit mining and milling operation with a 14.3-year mine life and an average gold production of 195,000 ounces per year for the first 12 years, resulting in a 22% after-tax rate of return.

At a US$1,700 gold price and an exchange of 0.75, Marathon generates a post-tax, net present value (“NPV”) of $648 million, which far exceeds its current market cap (US$331 million). The project is highly levered to gold prices, as every $100/oz increase in gold leads to an additional $200 million in NPV.

Therefore, a $2,000/oz gold price gives the project a $1+ billion NPV, with an exceptional IRR of 32% and a NPV/Capex ratio (using a 5% discount rate) of 2.3-times.

The project appears to be progressing along well, too, with Marathon receiving most of its permits and the project now financed and site early works just beginning a few months ago, and commercial production could begin by late-2024 or early 2025.

However, Marathon is also committed to exploration as its mine construction progresses. The company’s goal is to increase the amount of mineable gold mineralization within the scope of the current mine plan and making new discoveries on the Valentine property that could lead to additional reserves and resources.

For 2023/24, Marathon plans to complete a 70,000-meter drill program, with the goal of creating a grade control model that will aid in the early reconciliation and forecasting of mine production (meaning more gold could be produced earlier in the mine plan, which would lift the project’s value).

This project has grown considerably over the past few years, so there’s reason to believe that 2023’s exploration will lead to further resource gains. For example, Marathon has seen its resource grow from a paltry 1.4 million ounces in 2017, to 4.0 million ounces as of June 2022!

As for permitting: Its project is subject to oversight by the Canadian Environmental Assessment Act, 2012 and the Newfoundland and Labrador Environmental Protection Act. According to company documents, the company has already completed its provincial and federal environmental assessments and is in the process of obtaining the necessary site-specific permits.

Marathon believes that the project will significantly impact the local economy, as it is expected to create an average of 405 jobs during construction and 522 jobs during operations. Additionally, the project is expected to pay a total of $598 million in federal and provincial income taxes and mining duties.

Why is Marathon Gold's stock down?

Marathon Gold has been one of the gold sector’s worst performers over the last year, with its shares falling by 65%, easily underperforming the junior gold miners ETF ( GDXJ ), pictured in the light blue line, which is down 10.88%, and the Gold Explorers ETF ( GOEX ), pictured in the purple line, which has fallen by 12.30%.

So, what the heck happened in 2022?

1. Cost overruns

The first big bomb of 2022 came on Sept. 1, when Marathon reported a construction decision for the Valentine project.

In this news release, Marathon reported that the project’s construction cost to complete, including early works being carried out in the fourth quarter of 2022, will be in the range of C$470 to C$490 million. (According to the recent feasibility study , the actual figure will come in at C$463 million, or 51.3% higher).

This is a huge increase from the C$305 million figure reported in the company’s prior feasibility study, largely blamed on inflationary pressures that have built up over the past few years.

In addition, the revised assessment also reflects certain changes in scope, primarily related to updated staffing levels and an extended construction schedule of 28 months instead of the previously planned 22 months. So, the project will also take longer to complete.

As of August 2022, the cost estimate for this project reflects the most current market bids, contracted prices, and equipment leasing arrangements. It also takes into account current market data for labor and consumables, including diesel. However, it is important to note that this estimate is subject to change, especially if inflationary pressures don’t ease.

The market clearly didn’t like this news, and for good reason, as the mine will be 51.3% more expensive to build, with very little increase in value.

2. Equity financing

Following the updated feasibility study, Marathon Gold announced and closed on a new C$150 million bought deal financing with Canaccord Genuity Corp. and other underwriters, in which it sold 136,364,000 units of its stock at a price of $1.10 each, for a total of $150 million.

Each unit includes one common share of the company's stock and a warrant that allows the holder to buy an additional common share for $1.35 within 24 months. If the company's stock price is above $1.75 for 10 consecutive days after the sale, Marathon Gold can choose to shorten the warrant's expiration date to 30 days after they give notice to the holders.

It is common for gold companies, especially those in the development and exploration stages, to sell additional shares of stock through underwritten offerings to raise capital. But this financing deal has not been well received by the market due to the low share price and dilution to existing shareholders.

Marathon’s share count rose to 393.3 million shares, and 472.6 million fully diluted when you count its 11.2 million stock options ($2.08 exercise price) and 68.2 million warrants ($1.35 strike price).

Marathon Gold: Understanding the Stock’s Valuation

Now, for some good news. I believe all of this bad news - namely, the cost overruns and equity dilution - is already priced into its stock.

Marathon currently has a market cap of US$331 million (as of Jan. 4), well below its projected net present value according to the feasibility study (US$581 million at spot gold prices).

The company has ~US$120 million in the bank, access to a US$185 million Sprott credit facility, plus an US$81 million equipment leasing, according to its corporate presentation. So, with US$386 million in available capital, and US$340 million in upfront costs remaining, it's possible Marathon will get its project built with minimal further debt or equity dilution.

It’s also important to understand that Marathon operates in one of the top mining jurisdictions in the world. Newfoundland and Labrador ranks highly on the Fraser Institute’s Annual Mining Survey . Therefore, you can argue that Marathon deserves a higher valuation for its jurisdiction.

What’s Marathon Gold’s upside?

I think Marathon could be worth over US$500 million by the time its gold mine is producing ore. In an upside case with gold prices north of $2,000/oz, I can see its market cap commanding a valuation closer to $1 billion, which is close to the project’s NPV from the feasibility study. Note that a $1 billion valuation would lift its stock price to US$2.54 based on the current share count, signifying potential upside of more than 100% (compared to a 10% gain in gold prices).

I also think that Marathon is a strong takeover target in 2023 due to the Marathon project’s strong economics and top-tier jurisdiction. I can see a larger mid-tier or senior producer scooping up the company to improve its jurisdiction risk and add a future low-cost producing mine to its portfolio. But that is purely speculation on my part, and I'm not aware of any interested miners at the moment.

Marathon Gold: Key Risks and Uncertainties

Of course, investing in Marathon Gold comes with several risks that you should carefully consider. I dug into Marathon Gold’s annual report to summarize what I think are the biggest risks to investing in the company.

Commodity price risk. The possibility that changes in the price of gold could negatively impact the value of Marathon Gold's assets and financial performance. Gold prices can be volatile and are influenced by various factors such as economic conditions, interest rates, and geopolitical events.

Operational risk. The potential for delays or cost overruns in the development of Marathon Gold's gold projects. This could impact the company's financial performance and future profitability.

Currency risk. Fluctuations in foreign exchange rates could impact Marathon Gold's future financial performance. As the company operates internationally, it is exposed to the risk of depreciation of the Canadian dollar against other currencies.

Liquidity risk. Gold may have difficulty meeting its financial obligations. As a gold development company, it has significant capital expenditure requirements and may not have a steady cash flow until its gold projects are operational. There is also a risk that the company may face additional cost overruns, which could lead to the need for more debt or dilution of shareholder equity.

Environmental and regulatory risks. Gold companies, including Marathon Gold, face a range of environmental, social, and governance ("ESG") risks. Marathon must comply with a range of environmental regulations and may face financial penalties or project delays if it fails to do so.

Is Marathon Gold Worth a Speculative Bet? My Take

In conclusion, Marathon Gold is a gold development company that has faced challenges in the past year, with its shares falling 65%. However, based on the company's current valuation, the value of its gold project, the location of its project, its exploration upside, and the likelihood of higher gold prices in the future, the stock offers compelling value and may be a good investment opportunity for some investors.

The project is expected to have a long mine life and strong gold production and is highly leveraged to gold prices. While there are risks and challenges to consider, the project is progressing well and is expected to begin commercial production by late 2024 or early 2025. Marathon also has the potential to discover additional gold deposits that could be included in its future mine plan, which would likely add more value to the company.

Please carefully consider these risks and conduct your own due diligence before making any investment decisions.

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